Lesson video

In today's lesson, we'll look at interest rates.

How do they work when we're saving money with a bank or a building society, and also, how do they work when we're borrowing from them? Welcome to another lesson with me, Mr. Bailey.

Today's lesson, growing money, we'll look at interest rates.

Before we do that, let's look at what you're going to require for this session, then we'll look at the success criteria, and then on to the breakdown of the lesson.

For today's lesson, the only things you're going to need are a pen and a pencil, some paper or notebook, and in an ideal world, a quiet space to work if you can find one.

By the end of the lesson, you'll understand that by saving money in a bank or a building society, people can earn interest.

You'll recognise that borrowing money in order to buy something is known as a loan, which usually has a general interest charge, and that means that we're going to pay back more than we borrow.

And then finally, we'll be creating a feelings map on how someone might feel when they borrow some money.

So to the breakdown of today's lesson, the first thing we'll consider is the fact that money makes money.

That's an interesting term.

Then I'll talk to my alter ego, Daniel, about interest and what that means.

Then after that, I'll talk to him again in relation to the loans and what loans are.

And finally, I'll be enlisting the help of my alter ego, Daniel, again, when we talk about the fact that money can be a risky business.

In our last task, we'll be looking at creating a feelings map.

Let's imagine I was to gift you all a thousand pounds.

You could spend it on something you've always wanted, or alternatively, you could hide it under the bed, although I'm not too sure that would be a very secure place to put it.

But the alternative would be to put it into a bank or a building society.

A bank and a building society are pretty similar.

They've got different rules as to how they're run, but in essence, for our purposes, they're pretty much the same.

Now, one of the benefits of putting it into the bank or a building society is that it's very secure.

Only you can get it, and you can get access to it whenever you want.

But why would a bank agree to look after your money, keep it secure, and allow you to access whenever you want for free? Can you think about that? Have a note down of any ideas as to the reasons why banks might look after our money.

Pause the video, see how many ideas you can come up with, and then play the video once you've finished.

How many ideas did you come up with? Why do you think banks would look after our money and keep it secure for us? Okay, yeah, right, some good suggestions.

And it sounds like most of you got the right idea, well done.

so when you give money to the bank, they made the decision that they're going to lend that money to other people, and they charge them for the privilege of it.

The money that they charge them is called interest.

So when someone takes a loan out at the bank, the charged interest for doing that.

However, it's not all take.

Because the banks are using your money, they sometimes also give you some money for allowing them to use it.

And the amount they could give you is also called interest.

So if you've got money and you put it into the bank, you can earn extra money on top of that for allowing the bank to use it.

So in essence, it's pretty easy to make more money.

If you invest it into the bank or building society, money makes more money.

I spoke with Daniel yesterday about the interest that you can get on your savings when you invest money into the bank.

Let's see how that works with the help of my alter ego, Daniel.

I don't really understand how interest works.

Can you explain it to me again? Okay, so I give you a hundred pounds.

Thank you very much, Mr. Bailey.

Not really, for the example, to help the children to understand it.

Okay, and I put it into the bank? Yeah, so let's say I'm the bank, and I agree that because you're putting money into my bank, I'll give you a reward or interest on your money each year.

How about I give you 1% every year? So at the end of the year, you leave the money in your account with me, and you won't have a hundred pounds, you'll have 101 pounds, because 1% of a hundred pounds is one pound.

I'm sure the children learned that at school.

That sounds pretty good.

So the bank look after my money, they keep it secure, and they give me money to do it? They are so nice.

Yeah, well, they do provide a good service, but they aren't doing it all for the good of you.

They're doing it to make a profit, to make money.

We can talk a little bit more about that later, but for now, what did you learn? I learned that banks look after your money, and that they give you something called interest on your money, and that that's a percentage of the money that you save with them, is it always 1%? No, it's not always 1%.

Different banks pay different interest rates, and also each bank will have different types of bank accounts that they might pay different amounts of interest on depending upon the type of account you've got.

I'm not too sure we need to go into all that quite yet though.

Before we move on, let's look at what we've learned so far.

The first thing we learned is that when you save or invest your money into a bank or building society, they sometimes reward you by paying you something called interest.

The next thing we learned is the interest is worked out using a percentage of the amount you invest, and it can vary from bank to bank, but also from account to account.

Banks have a number of different types of accounts that you can invest your money into, and sometimes the interest rate's different.

And then finally, we identified the fact that banks help to keep our money safe and they give us access to it when we need it.

We've learned what happens when you have money and you put it into a bank account.

Now let's look at the other end of the spectrum.

One of the other key services that banks and building societies offer, and that's about when someone needs to borrow money to pay for something that they can't afford at the time.

Okay, I get what interest is.

It's the profit or the reward that I get for letting the bank use my money.

But what do you mean use my money? And you said before that the banks make a profit from my money, how does that work? Well, if I take you back to that a hundred pound that you invested in my bank earlier, can you remember the interest rate that I rewarded you with? Yeah, 1%.

So at the end of the year I had 101 pounds.

Correct.

Well, let's imagine that someone else doesn't have a hundred pounds and they need to borrow it from me to pay for something, and they come to me to ask for something called a loan, and a loan is an agreement where I agree to lend them money, and they agree to pay it back over a period of time.

Right, so that they can buy the item they want right now, rather than having to save up for it.

It sounds good.

Yeah, but as a bank, I'm not going to do that for free.

Remember how you were given interest on your savings? Well, I'm now going to charge the person interest that me helping them out.

Okay, so because you're helping them to buy things early, you want some sort of compensation for it, do ya? Yeah, well, here's the clever part.

I charged them 2% interest.

So they will pay me back 102 pounds by the end of the year.

Hmm, wait a minute.

That means that you've taken my money from me and given me one pound, and you've used that money to charge someone two pounds in interest.

You've made a one pound profit.

Yes, exactly.

And that's one way that the banks and building societies make their money.

well, they aren't going to make much if they're only making one pound every time.

Remember that we only provided the interest rates, one and 2%, as an example.

Different banks have different interest rates.

And sometimes the difference between the interest rate that they give people for saving and charge people for borrowing is much, much more than 1%.

And remember, they've got thousands of people all across the country wanting to borrow.

Ah, right, and what you said before that money is making money? That's pretty interesting.

Get it, interesting? If you say so.

On the next slide, we'll look at some current interest rates from both borrowing and investments from different banks.

Let's have a go at this mathematical problem.

Here on the slide, we've got three different banks, Bank One, Bank Two, and Bank Three.

On the left, we can see the interest rate of the reward that they give to savers, people who invest the money with them.

Bank Three, for example, rewards their customers with 3% interest each year on their savings, and on the right, we can see the interest rate that they charge people who want to take out a loan.

So for example, Bank Two will charge people 13% interest each year for anyone wanting to take out a loan with them.

Now, with this information, we can work out the profit, the difference between the money they give, and the money they take for every hundred pound invested.

I'm going to do that for Bank One, and then I'd like you to work out the profit for Banks Two and Three for every hundred pounds that's been invested.

So let's look at Bank One.

Bank One gives 1% interest on any savings.

So if someone invested a hundred pounds, they'd have to pay out 101 pounds.

But if you wanted to take a loan with them, they would charge you 13% interest, which means for every hundred pounds that someone borrowed, they would get 113 pounds.

So if we look at those two figures, the difference between those two figures, if we take 101 pounds away from 113 pounds, the total profit would be 12 pounds for every hundred pounds that was invested with that particular bank.

What I'd like you to do is to work out the profit for every hundred pound invested or borrowed for banks number Two and Three.

Can you work out which bank makes the most profit on every hundred pounds invested or borrowed? Pause the video, work it out, and then once you've finished, play the video again, and we'll walk through some answers, Did you manage to work it out? A little bit of a trick question, wasn't it? Because there wasn't just one bank with the most profit, there was two.

If you looked at the three banks, Bank One, for every hundred pounds, had a 12 pound profit.

Bank Two had an 11 pound profit, and Bank Three had a 12 pound profit.

So that meant that Bank One and Bank Three, both made the same profit, even though the interest rates were different.

So obviously banking is a complex industry.

It's not as simple as we've made it out here on this slide, and we haven't got time to go into the complexities of interest rates.

Let me tell you, there's some people who earn lots of money in the banking industry for being able to understand and explain how it all works, but at least we've looked at the basics, and remember that profit is needed to pay for things like bank cards and the staff, and keeping the banks on the streets open.

These investments or loans are just one way that banks and building societies make their money.

We've already talked about loans, and loans are great when you need money quickly for things that you need to pay for, but there are some risks and pitfalls about taking a loan.

I discuss some of them with Daniel today, let's look at what was said.

A risky business.

Why is it a risky business? Yeah, it can be a really risky business.

The first risk is about making a good decision about who to borrow money from.

It may appear that the banks make a tiny profit, but there are some lenders out there who are less reputable that charge interest rates into the hundreds.

Can you imagine paying a hundred percent interest? Whoa, so I'd have to pay back 200 pounds? Double what I borrowed? Yeah, if you borrowed it over a year.

Some are even higher than that.

It's a good job that I can't borrow until I'm 18, then.

It sounds like a bit of a minefield to me.

Yes, it is, but there's plenty of good advice out there about borrowing, and you can always ask someone you really trust.

It's really important you do your research before taking out any loans to make sure you can afford it.

Also, what do you think might happen if you can't afford to pay back the loan that you take out? I suppose they'd take back the items you bought with the money in the first place.

Yeah, that's right, but don't forget that if it doesn't cover the money that you borrowed, all the money you owe, they could take other items that you own to help pay it back.

Some people have lost their car or even their house as a result of not being able to pay loans.

Oh, my word, that sounds pretty grim.

So what you're saying is there's some great things about taking out a loan.

Not only you get the item now, don't have to wait, but there's also some pretty big risks.

Exactly.

So how do you think you'd feel if you had to take out a loan yourself? Pretty mixed emotions, I guess.

Perhaps we should get the children to think about that and create a feelings map, documenting how they would feel? What a great idea as usual.

Well done, Daniel.

So children, to our last task for today, I'd like you to create a feelings map.

A feelings map is going to detail your thoughts, your feelings, and your emotions in relation to taking out a loan.

I'm sure there'd be some really positive and exciting ones about getting that new item here and now, but there may be also be some nerves or anticipation, some anxiety in relation to taking the loan out in the first place.

I asked Daniel to create a feelings map himself.

So on the next side, we'll look at the waggle that he produced for us.

Here is Daniel's waggle in relation to our thoughts and feelings map.

Now he's put bank loan in the centre of his page because that's what his thoughts and feelings are about.

And he sort of separated this page into two halves.

On the right hand side, he's got his worries and his concerns, and there's some bubbles there with some key words in relation to his worries and his concerns.

He's drawn a couple of pictures too.

And then on the left hand side, he's written down some positives.

And again, he's linked that with some words that might describe how we might feel about being really happy.

So if you look at the right hand side, we've got, will he be able to afford it? What might happen if he can't? And there's some words there that describe how he might feel.

He's a little bit worried, a bit anxious about taking the loan out.

He also talks about the fact that you're not too sure about which interest rate would be the best one, which bank to go to, which lenders should he use.

So he's a little bit confused and nervous about it, but there are some real positives to getting a loan, so he's mentioned those, too.

He'll be able to get it now, it's going to make him really happy, and he doesn't have to wait.

So he's going to feel fulfilled.

He's going to feel really happy.

And there's some things that he can do to make sure that bank loan gets paid off really, really effectively.

So for example, he's talked about the fact that he can do some research so he's going to remain focused.

He'd be able to plan his incomings and his outcomings to make sure that he can afford the loan.

So there is Daniel's thoughts and feelings map.

I'd like you to have a go at it yourself.

Put yourself in the position of someone who's going to be taken out a loan.

There's some positives and some negatives.

How would you feel? Let's get all those thoughts, feelings, and emotions down on a page, plenty of drawings, plenty of colour, plenty of words that use to describe how you would feel.

Have fun doing it, and I'll look forward to seeing some of your work.